Federal Reserve policymakers won’t take much signal from a decline in first-quarter U.S. GDP, but by June clearer signs of a faltering economy will move central bankers to resume cutting interest rates, ultimately by a full percentage point by the end of the year, traders bet on Wednesday.
The U.S. economy contracted by an annualized 0.3% last quarter, the Commerce Department’s Bureau of Economic Analysis said on Wednesday, as American businesses rushed to buy imported goods ahead of President Donald Trump’s barrage of tariffs. Consumer spending downshifted to a 1.8% pace from a 4% pace last quarter.
The report contained “clear signs that the economy already was fundamentally slowing” last quarter, economists at Pantheon Macro wrote. “A period of stagnation now likely lies ahead if the current set of tariffs is maintained, with recession the most likely outcome if the additional reciprocal tariffs are imposed in full in July.
US tariffs could push up inflation, slow growth: Fed official
Futures contracts that settle to the Fed’s policy rate continued to point to a start to Fed rate cuts in June, with a total of four quarter-point reductions likely, bringing the rate to the 3.25%-3.5% range by year-end.
Fed policymakers meet next week and are nearly universally expected to keep rates in their current 4.25%-4.5% range. Central bankers say they expect the tariffs to boost prices and slow the labor market, a difficult mix because the Fed can’t fight both problems at the same time.
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